Working Papers

On Understanding the Cyclical Behavior of the Price Level and Inflation (with William Brock)

For business cycle researchers, two facts have emerged in the post-World War II data. The two are that the contemporaneous correlation coefficient for the price level and output is negative and the contemporaneous correlation between the inflation rate and output is positive. In other words, the price level is countercyclical and the inflation rate is procyclical. There are two broad questions that come to mind based on the literature. First, there are two business cycle facts presented. One goal, therefore, is to develop a methodology that characterizes the joint distribution function. Our aim is represent the probability of any particular data pattern in an empirically disciplined way that also respects "model uncertainty." We apply this methodology to the particular question of the correlation between the price level and output and the correlation between the inflation rate and output. In our view, the methodology could easily be extended to characterizing the likelihood of other business-cycle correlations. Second, we are interested in providing some theoretical to account for these two facts. We propose rational inattention as a type of friction that could account for this pair of facts. We then provide quantitative results from a model economy to support this view.

Money and internal specialization (with James Dolmas)

In this paper, we demonstrate that money is not necessarily benign in terms of trade patterns and specialization within the household. In this paper, we examine model economies in which households consist of vendor-shopper pairs. There is a distance-related transaction cost between traders. We derive the equilibrium range of goods that will be traded in a symmetric equilibrium under two alternative means of payment: (i) goods for goods and (ii) money for goods. Our key finding is that in the money-for-goods economies, we show that the incidence of the transaction cost matters. Money creates incentives for household members to specialize. This intra-household specialization is identified along the extensive margin of consumption. Shoppers specialize in acquiring a greater variety of goods when they bear the transaction cost. In contrast, in the vendorpays setting, the cost-minimizing allocation is to trade along the intensive margin for a single consumption good.